Moody’s Takes Action in Light of European Financial Crisis
Finances and banking institutions, the economy and currencies all rely on a simple thing to keep them operating smoothly: Trust. Today, a company designed to gauge the trustworthiness of financial institutions, Moody’s, has signaled to the world that they have less faith in 15 international banking institutions.
Today’s move by Moody’s was not a small step down, nor was it limited in scope. In fact, the 15 financial institutions represent some of the largest and most well-known banks in the entire world. The action, though, according to a release from Moody’s, is in response to a “reassessment of the inherent risks of capital markets” and is “relevant to almost all financial institutions with some exposure to such activities.”
The institutions affected by today’s action include Bank of America, Barclays, BNP Paribas, Citigroup, Credit Agricole SA, Credit Suisse, Deutsche Bank AG, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada, Royal Bank of Scotland, Societe Generale, and UBS .
In the press release, Moody’s Global Banking Managing Director Greg Bauer is quoted as saying: “All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activitiesHowever, they also engage in other, often market leading business activities that are central to Moody's assessment of their credit profiles. These activities can provide important 'shock absorbers' that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.”
Moody’s is an organization that, according to its web site, “is an essential component of the global capital markets.” At its core, it researches a company or entity, determines its creditworthiness, or trustworthiness, or just plain exposure to risk, and then they issue a rating. This rating is a figure of that entity’s (country, corporation, etc.) ability to meet its obligations. Something similar, in broad strokes, to a person’s credit score.
These ratings are not unlike the numeric score personal consumers are most familiar with; however, they definitely look different. The ratings range from “Aaa”(the least risk) to “C”(the most risk). There are additional ratings, as well, that rate how credit worthy a company is in short term, long term, secured, unsecured and other types of financial instruments, and more information about the individual ratings can be found here.